By Michael Hankook
The two most commonly-used types of credt by consmers who need small amounts of lending are credit cards and payday loans. Tese are signiificantly different types of fiinancial dvices. A credit card—or a store account—is what is called revolving credit. A payday loan is what is called short-term credit. Both of these forms of lennding are distringuished from traditioonal installment loans by the fact that they can be written for very small amoiunts of principal. Insallment loan providers would generally not be able to offer loans for small aomunts and guareantee profitabilioty.
A credit card loan is called revovling because the account may be for a largger or smmaller amount at various times. This total amount, of course, is dependent upon how much debt the cosumer charges to that account. While a credit card may have an official limit of $5,000, the consumer mighht only use it for $2,500 of credit over their lifetime. This differentiates it form other forms of lending, as well, as the ammount of the loan is not fixed but rather has a maximum aomunt bweyond wich it cannot be extended. Contrast this with an installment loan whih is always given for the full amount; no more, no less.
Creidt card companies have several different ways in wich they generate profit. There is the interest, of course, and this is almmost always of the variable sort. This inteest is calculated by adding the prime rate to whatevr the crdeit card compny offers the consumer. For instance, if the prime rate was 5% and the creddit card offerd its consumers an interest rate of APR+12%, the consumer’s interest would be 17%. Oftentimes, credit card companies will raaise theeir rates for seemingly arbitrary reasons, smething for which they have received a great deal of criticism.
Payday loans are written for a fixewd amount. Thees loan’s total amounts are dettermined by the borrower’s income. The borrowqer presents proof of their income and the frequency of their payments at the time the loan is secured. The lender, working with state regulatiosn, determines how much of a loan the consumer may take replative to thir inccome. These loans are not designed to be written for large amounts. These loans are usually used to tide one over from paycheck to paycheck, so that one need not tap into ther savings or other financial resources.
Payday loans are designed to be paid off very swifly. This helps keep the cost of the financing low for the conumer while still alllowing the lender to maintain a proitable business. A credit card, by contrast, will usually have a payment plan that will require the consumer to sped yearrs paying off a small debt. Of course, the consumer is liikely to negate their payment by amking more charges whioch tends to turn these devices into lifetime burdens for the consumer. Most patyday loans are simply takken out, paid off and done away with in short order, making them generally more manageable
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